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Tarpon Bay Partners, LLC v. Zerez Holdings Corp.

United States District Court, D. Connecticut

September 24, 2019



          Stefan R. Underhill, United States District Judge.

         This dispute arose from an alleged agreement for Tarpon Bay Partners, LLC (“Tarpon Bay”) to acquire common stock shares of Zerez Holdings Corporation f/k/a Definitive Rest Mattress Company, n/k/a Smart Cannabis Corp. (“Zerez”) pursuant to a promissory note. The purported agreement broke down and Tarpon Bay filed this case asserting three causes of action against Zerez: specific performance (count one); declaratory judgment (count two); and breach of contract (count three). See Am. Compl., Doc. No. 61. In response, Zerez asserted eleven counterclaims against Tarpon Bay, Southridge Advisors II, LLC (“Southridge”), and Stephen Hicks (“Hicks”) (together, “counterclaim defendants”). Counterclaims, Doc. No. 73 at 7-30. Specifically, Zerez asserted: breach of implied contract against Tarpon Bay (counterclaim one); declaratory judgment against Tarpon Bay (counterclaim two); breach of fiduciary duty against Southridge (counterclaim three); usury against Tarpon Bay (counterclaim four); rescission against Tarpon Bay (counterclaim five); fraudulent inducement against all counterclaim defendants (counterclaim six); mistake against all counterclaim defendants (counterclaim seven); aiding and abetting and civil conspiracy against all counterclaim defendants (counterclaims eight and nine, respectively); violations of California Unfair Competition against all counterclaim defendants (counterclaim ten); and violations of Connecticut Unfair Trade Practices Act (“CUTPA”) against all counterclaim defendants (counterclaim eleven). See Counterclaims, Doc. No. 73.

         Tarpon Bay seeks summary judgment on all three of its claims against Zerez and all twelve of Zerez’s affirmative defenses. See Mot. Summ. J., Doc. No. 75. Further, the counterclaim defendants seek summary judgment on all eleven of Zerez’s counterclaims against them. Id. Zerez also filed a motion to strike an affidavit from Hicks. See Mot. to Strike, Doc. No. 85. I held oral argument on May 23, 2019 and took all motions under advisement. For the following reasons, Tarpon Bay’s Motion for Summary Judgment (doc. no. 75) is denied in part, denied as moot in part, and denied without prejudice in part. Zerez’s Motion to Strike (doc. no. 85) is denied.

         I. Motion for Summary Judgment (Doc. No. 75)

         A. Standard of Review

         Summary judgment is appropriate when the record demonstrates that “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986) (plaintiff must present affirmative evidence in order to defeat a properly supported motion for summary judgment). When ruling on a summary judgment motion, the court must construe the facts of record in the light most favorable to the nonmoving party and must resolve all ambiguities and draw all reasonable inferences against the moving party. Anderson, 477 U.S. at 255; Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Adickes v. S.H. Kress & Co., 398 U.S. 144, 158–59 (1970); see also Aldrich v. Randolph Cent. Sch. Dist., 963 F.2d 520, 523 (2d Cir. 1992) (court is required to “resolve all ambiguities and draw all inferences in favor of the nonmoving party”). When a motion for summary judgment is properly supported by documentary and testimonial evidence, however, the nonmoving party may not rest upon the mere allegations or denials of the pleadings, but must present sufficient probative evidence to establish a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986); Colon v. Coughlin, 58 F.3d 865, 872 (2d Cir. 1995).

         “Only when reasonable minds could not differ as to the import of the evidence is summary judgment proper.” Bryant v. Maffucci, 923 F.2d 979, 982 (2d Cir. 1991); see also Suburban Propane v. Proctor Gas, Inc., 953 F.2d 780, 788 (2d Cir. 1992). If the nonmoving party submits evidence that is “merely colorable”, or is not “significantly probative”, summary judgment may be granted. Anderson, 477 U.S. at 249–50. The mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact. As to materiality, the substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted. Id. at 247–48. To present a “genuine” issue of material fact, there must be contradictory evidence “such that a reasonable jury could return a verdict for the non-moving party”. Id. at 248.

         If the nonmoving party has failed to make a sufficient showing on an essential element of his case with respect to which he has the burden of proof at trial, then summary judgment is appropriate. Celotex, 477 U.S. at 322. In such a situation, “there can be ‘no genuine issue as to any material fact, ’ since a complete failure of proof concerning an essential element of the nonmoving party’s case necessarily renders all other facts immaterial.” Id. at 322–23; accord Goenaga v. March of Dimes Birth Defects Found., 51 F.3d 14, 18 (2d Cir. 1995) (movant’s burden satisfied if he can point to an absence of evidence to support an essential element of nonmoving party’s claim). In short, if there is no genuine issue of material fact, summary judgment may enter. Celotex, 477 U.S. at 323.

         B. Background

         The dispute between the parties arose from a purported agreement for Tarpon Bay to acquire Zerez common stock shares. Generally, Tarpon Bay alleges that it is entitled to a certain number of shares pursuant to a contract formed between Tarpon Bay and Zerez. See generally Am. Compl., Doc. No. 61. Zerez alleges generally that Tarpon Bay, Southridge, and Hicks behaved in a way during the alleged formation of the agreement that precludes the enforcement of any purported agreement. See generally Counterclaims, Doc. No. 73.

         Tarpon Bay is a limited liability company “organized under the laws of the State of Florida.” Tarpon Bay Rule 56(a)(1) Statement of Undisputed Facts (“56(a)(1) Stmnt”), Doc. No. 76 at ¶ 1. Zerez alleges that Tarpon Bay “holds itself out to provide business consulting services.” Counterclaims, Doc. No. 73 at ¶ 4. Southridge is a Connecticut limited liability company, and Zerez alleges that Southridge “renders financial services to clients” and specializes in “direct investment and advisory services to small and middle market companies.” Id. at ¶ 5. Hicks manages and owns both Tarpon Bay and Southridge. Counterclaims, Doc. No. 73 at ¶¶ 4-6. Zerez is a “corporation organized under the laws of the State of Oklahoma with headquarters in Roseville, California.” 56(a)(1) Stmnt at ¶ 2. Zerez is a publicly traded company (previously traded under “ZRZH”, now “SCNA”) that “invests in, manages, and owns emerging companies and technologies.” Counterclaims, Doc. No. 73 at ¶ 3.

         The parties became acquainted in roughly January 2016. 56(a)(1) Stmnt, Doc. No. 76 at ¶ 8. At the time, Zerez alleges that it had over $500, 000 in liabilities and “was seeking to reduce its liabilities and raise new capital to fund operations and growth.” Counterclaims, Doc. No. 73 at ¶ 15. The way the parties connected, however, is in dispute. Zerez alleges in its counterclaims that it was frequently receiving “‘cold calls’ from venture capitalists, fundraising brokers, or financial advisors offering to provide financial services … in exchange for stock” and in January 2016, Zerez received a cold call from Anish Aswani of Southridge. Id. at ¶¶ 16-17. Zerez alleges further that, in the cold call, Aswani “offered to provide financial advisory services to Zerez … [and] failed to disclose that he was working for Hicks … [and] that Hicks was involved in litigation” with the SEC and the state of Connecticut for fraud related to securities transactions. Id. at ¶ 17. Tarpon Bay, however, disputes that it (or someone connected to it) “cold called” Zerez but, instead, asserts that the parties were connected “through a third party familiar with both companies that had recommended to Zerez that Tarpon might be able to assist Zerez in reducing its carried debt[.]” 56(a)(1) Stmnt, Doc. No. 76 at ¶ 10.

         Nonetheless, the parties agree that Zerez and a counterclaim defendant engaged in discussions around January 2016 “regarding a prospective transaction in which [Tarpon Bay or another party] would purchase debts owed by Zerez to various creditors and then obtain court approval for [Tarpon Bay or another party] to receive Zerez common stock in exchange for retiring the purchased debts.” 56(a)(1) Stmnt, Doc. No. 76 at ¶ 8; Zerez 56(a)(2) Statement of Facts (“56(a)(2) Stmnt”), Doc. No. 84-14 at ¶ 8. Tarpon Bay alleges it was engaged in discussions and negotiations with Zerez, Zerez alleges it was Southridge via Aswani. Id. Nevertheless, the parties agree that the proposed agreement would exempt from registration the common stock received in exchange for retiring the debt, pursuant to section 3(a)(10) of the Securities Act of 1933.[1] Id. One of the purposes of the proposed transaction “was to reduce the carried debt on Zerez’s balance sheet, making it a more attractive candidate for future investors and lenders.” 56(a)(1) Stmnt, Doc. No. 76 at ¶ 9; 56(a)(2) Stmnt, Doc. No. 84-14 at ¶ 9.

         On or about January 15, 2016, the parties executed a Liability Purchase Agreement Confidential Term Sheet (“Term Sheet”). Id. at ¶ 12; Id. at ¶ 12. The Term Sheet provided that Tarpon Bay would purchase and retire up to $1, 000, 000 of outstanding liabilities held by Zerez’s creditors. Term Sheet, Ex. C to Hicks Decl., Doc. No. 77-3 at 2. The Term Sheet further provided that after the retirement of the liabilities, Zerez would issue to Tarpon Bay shares of common stock “pursuant to court approved settlement agreement.” Id. Tarpon Bay was to “seek court approval for the settlement of the Liabilities through the issuance of the” common stock shares “within [five] business days of execution of purchase agreements” with Zerez’s creditors. Id. The amount of common stock to be issued was subject to the following limitations: (1) “up to but not exceeding 9.99% of the total outstanding shares of common stock per tranche”; (2) shares shall be “sufficient to satisfy the liabilities”, but not more than necessary otherwise Tarpon Bay would return any excess shares; and (3) the shares could not allow Tarpon Bay to own more than 9.99% of the outstanding shares of Zerez common stock. Id. at 3.

         Further, Tarpon Bay was entitled to the following fees: (1) a $25, 000 signing fee which would be “due upon the execution of the term sheet” and was intended “to cover its expenses including the legal fees”; and (2) a success fee, a non-refundable commitment fee, which was to be “equal to the greater of (a) five percent (5%) of the aggregate amount of the liabilities in the settlement agreement or (b) $75, 000.00, upon the approval of the fairness of the transaction by the court.” Id. at 4. Both fees were to be paid “in the form of a convertible promissory note, maturing six (6) months from the date of issuance … [and] shall have no registration rights [and] shall carry an annual interest rate of 10% and shall be convertible into the common stock of [Zerez] at 50% of the low closing bid price for the thirty (30) days prior to conversion.” Id. at 4. The Term Sheet provided that the terms “do not constitute a contractual commitment” between the parties, “but merely represent[s] proposed terms for possible liabilities satisfaction”, and “[u]ntil definitive documentation is executed by all parties, there shall not exist any binding obligation, other than as described in ‘Confidentiality’ and ‘Exclusivity.’” Id. at 5. Hicks testified that the “definitive documentation” statement was “leftover” from a different agreement and the terms on the term sheet were “essentially terms of the understanding between Tarpon Bay and Zerez.” Hicks Depo Tr., Ex. A to Reply in Supp Mot. Summ. J., Doc. No. 90-1 at 126:24-127:7. The Term Sheet was signed by Juan Murga, Zerez CEO, and Hicks “advised by” Southridge. Id.

         On January 27, 2016, Zerez executed a 10% convertible promissory note in favor of Tarpon Bay in the amount of $25, 000, in satisfaction of the signing fee obligation (“Promissory Note”).[2] 56(a)(1) Stmnt, Doc. No. 76 at ¶ 24; 56(a)(2) Stmnt, Doc. No. 84-14 at 24. The Promissory Note “contained [a] provision for conversion of principal and accrued interested thereunder into unrestricted shares of Zerez common stock.” 56(a)(1) Stmnt, Doc. No. 76 at ¶ 25; see also Promissory Note, Ex. E to Hicks Decl., Doc. No. 77-5 at ¶ 3. The conversion provision provides that the conversion price for common stock would be “at a 50% discount from the lowest closing bid price in the 30 trading days prior to the day [Tarpon Bay] requests conversion”, unless otherwise modified, subject to modifications with respect to the closing bid price on the date in question. Promissory Note, Doc. No. 77 at ¶ 3. In the Promissory Note, Zerez agreed “to instruct its stock transfer agent to reserve at least 500, 000, 000 shares of Zerez common stock for issuance to Tarpon Bay.” 56(a)(1) Stmnt, Doc. No. 76 at ¶ 25; see also 56(a)(2) Stmnt, Doc. No. 84-14 at ¶ 25; Promissory Note, Doc. No. 77 at ¶ 12.

         Tarpon Bay alleges that it sought out Zerez creditors who were amenable to selling their claims and, by the end of April 2016, it had entered into Claims Purchase Agreements with eight creditors to purchase claims against Zerez in the aggregate amount of $512, 874.06. 56(a)(1) Stmnt, Doc. No. 76 at ¶¶ 26, 28; see also Claim Purchase Agreements, Ex. F to Hicks Decl., Doc. No. 77-6. Zerez admits that it was aware of certain discussions that were happening between Tarpon Bay/Southridge and Zerez creditors. 56(a)(2) Stmnt, Doc. No. 84-14 at ¶ 30.

         The parties agree that court approval was required by section 3(a)(10) of the Securities Act “so that any common stock issued by Zerez to Tarpon [Bay] as payment for Success Fee earned in connection with the Claim Purchase Agreement would be exempt from registration.” 56(a)(1) Stmnt, Doc. No. 76 at ¶ 31. Tarpon Bay, through its lawyers, commenced an action on June 13, 2016 in Florida state court[3] to obtain the necessary court approval. Id. at ¶ 32. Tarpon Bay alleges, and Zerez does not deny, that in order for the section 3(a)(10) action to succeed, Zerez would need to appear via counsel and “enter into a stipulation with Tarpon wherein the parties would recite the facts and circumstances leading up to the stipulation and stipulate as to the fairness of the transaction.” Id. at ¶ 33; see also, 56(a)(2) Stmnt, Doc. No. 84-14 at ¶ 33. Tarpon Bay alleges, but Zerez denies, that Murga confirmed that Zerez had engaged a Florida attorney who would accept service of the complaint. 56(a)(1) Stmnt, Doc. No. 76 at ¶ 34; 56(a)(2) Stmnt, Doc. No. 84-14 at ¶ 34. As support for its contention that Zerez did so, Tarpon Bay cites to an email from Aswani to Murga in which Aswani states “the complaint for the [Section 3(a)(10) action] will be filed in court in the next 24 hours. Please let us know when you have Rick Savage engaged so that he can accept service of the complaint on behalf of Zerez” to which Murga responds: “Yes. I have contacted him, he will be sending me the paper work.” June 13 Email, Ex. G to Hicks Decl., Doc. No. 77-7.

         Despite Zerez’s statement that it was in discussions with Attorney Savage, he nor any other attorney appeared for Zerez in the Section 3(a)(10) action, nor did Zerez provide contact information for an attorney who would accept service on Zerez’s behalf. 56(a)(2) Stmnt, Doc. No. 84-14 at ¶ 35. Zerez contends Southridge had Savage contact Zerez and offer to represent it in the 3(a)(10) action, but required $7, 000, a sum that Zerez did not expect to have to pay for representation in the action. Zerez Disputed Material Facts Stmnt (“Disputed Stmnt”), Doc. No. 84-14 at pg. 11, ¶¶ 25-26. Further, Zerez contends that, although Murga sent Aswani the June 13 email, Murga was not advised that he needed to take any further action in order for the 3(a)(10) action to proceed. Id. at ¶ 28.

         The parties agree that the Florida state court action for the section 3(a)(10) approval did not proceed, but dispute the reason. Tarpon Bay alleges that Zerez “refused to participate” in the action and so the Claim Settlement Agreements could not be approved and therefore, despite its efforts, Tarpon Bay never earned the success fee for its purchase of the Zerez liabilities. 56(a)(1) Stmnt, Doc. No. 76 at ¶ 36. Zerez admits that it never issued a success fee note to Tarpon Bay (56(a)(2) Stmnt, Doc. No. 84-14 at ¶ 36), but argues that Tarpon Bay failed to commence the litigation within 10 days of the execution of the Claims Purchase Agreement and that ...

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